RAILA warns international investors against putting their money in Kenya’s next Eurobond

... risk of being converted into or being declared an Odious Debt on the basis of three widely acknowledged tests for Odious Debt :

a. Absence Of Consent: That the Eurobond debts were incurred without the consent of the People of Kenya (in respect of any portion of the proceeds not deposited into the Consolidated Fund)

b. Absence Of Benefit: That the expenditure of the Eurobond Proceeds were not applied towards the public benefit or for the intended purposes to fund Infrastructure Projects (in respect of the expenditure from the Eurobond proceeds that the National Treasury cannot account for or provide a list of projects funded by the Eurobond .

c. Creditor Awareness: that lenders, investors and the international banksthat acted as transactions advisors in Kenya’s Eurobond (and any proposed Eurobond issue) were aware, or should have been aware, of the above two conditions. Specifically Investors need to demand resolution of theunaccounted for proceeds and all unresolved matters on Kenya’s 2014 Eurobond prior to participating in any proposed future sovereign bond issue.

14. The Republic of Kenya has an excellent record since independence of honouring all its obligations including sovereign debt owed to external creditors and international capital-markets institutions. The Government of Kenya bears the responsibility of addressing and resolving to the satisfaction of the National Audit Office the significant and material issues raised in respect of Kenya’s 2014 Eurobond.

15. The inability of the National Treasury to account for expenditure from the Proceeds of the 2014 Eurobond and to provide a list of projects funded by the Eurobond is evidence that the source of repayment of the Eurobond is uncertain and unknown. Further the National Treasury has not made or is unable to announce tangible financial arrangementsfor repayment of the principal outstanding amounts of the Eurobond on maturity, for example by establishing Sinking Funds from annual Budget revenues.

16. This places Kenya at risk of sovereign default.At the minimum it places Kenya in A Pre-Default Stateand heightens the risk of external debt distress that could lead to sovereign default - and the attendant painful Sovereign Debt Restructuring (SDR). Both outcomes place the Country at risk of Collective Action Clauses by institutions and investors who subscribed to the Kenya’s inaugural Eurobond of June 2014. They could enforce their rights under the laws of the State of New York in the United States (following the example of the actions of Vukture funds in Argentina’s Sovereign Debt Restructuring). 

17. In the event of harsh and painful Sovereign Debt Restructuring Kenyan taxpayers face the risk of paying for the tough fiscal conditions that are likely to be imposed by private creditors and investors who subscribed to the 2014 Eurobond. The IMF by virtue of the USD 1.5bn Standby Arrangement (SBA) and Standby Credit (SBC) Facility that it extended to Kenya in March 2016 could also impose further conditions.

18. The Government needs to facilitate an independent, international audit of Kenya’s 2014 Eurobond and the nation’s external debt prior to accessing the international capital markets for the second Eurobond issue proposed.

19. We make the call for an Independent, international audit of Kenya’s 2014 Eurobond, this would be a Specific Eurobond Debt Audit covering the receipt, accounting and use of the Net Proceeds of the international sovereign bond. We recommend that this specific Eurobond Debt Audit be undertaken by an international audit firm working jointly with theIndependent Evaluation Office (IEO) of the IMF, the African Development Bank (ADB) and UNCTAD.

20. We also recommend an Independent, international audit of Kenya’sNational External Debt that goes beyond the current Debt Sustainability Assessment (DSA) framework. This debt audit needs to cover all national external debt owed bilaterally and multilaterally. Critically it must cover allnational external debt contracted from the international capital markets and ensure that there are no hidden or previously undisclosed borrowings. This recommendation is consistent with the IMF’s call for an independent international audit of an International Bond was not disclosed to the executive agencies of an emerging country nor approved by its legislature as required.

21. The National Debt Audits above should also comply with the UN Principles on Promoting Responsible Sovereign Lending and Borrowing especially the key principles on Agency, Due Authorization, Responsible Credit Decisions. In the context of Kenya these include:

a. Agency Principle: that Kenya Government Officials involved in the 2014 Eurobond transaction (and any proposed Eurobond issuance) are responsible to the country and the people of Kenya for protecting the public interest for which they are acting as agents.

b. Due Authorization Principle:that lenders and investors in Kenya’s Eurobond (and any proposed Eurobond issue) bear the responsibility of determining, to the best of their ability, that the Eurobond is appropriately authorized under Kenyan laws; and that the resulting Sovereign Bond Agreements are valid and enforceable under relevant jurisdictions.

c. Responsible Credit Decisions: that lenders and investors in Kenya’s Eurobond (and any proposed Eurobond issue) bear the responsibility of making realistic assessment of
Kenya’s borrowing capacity and ability to service its Eurobond debts based on the best available information.

22. Recent international experience of the concept of odious debt include discussions on Iraq’s debt in the Odious Debt Terms by Nobel laureate and economist, Joseph Stiglitz. in 2008 Ecuador declared its debt to beillegitimate on the basis that it was Odious Debt

23. We also call on the International financial markets and investors active in the sovereign Bond market to require, through the Transaction Advisors,
a. post disbursement (post-ante) verification and monitoring of projects financed by the 2014 Eurobond and
b. prior (ex-ante) investigations and verification of the projects to be financed by any proposed future Eurobond to be issued by the republic of Kenya

24. We wish to formally issue a Cautionary Notice and Notification of Material Facts (stated below) to Legal Counsel, Lead Managers and Transaction Advisors engaged or proposed to be engaged and potentialInternational investors (hereinafter collectively “Named Persons/Entities”) by the Republic of Kenya on the planned issue of its second Eurobond.

25. We wish to place On Notice the Named Persons/Entities (as defined above) that the Government of the Republic of Kenya has not accounted for the receipts and expenditures of the Net Proceeds of the International Sovereign Bond issued on 24 June 2014 as required under the Constitution of Kenya, 2010 and the Public Finance Management Act 2012, and to the satisfaction of the Constitutional National Audit Office. Further we caution the International markets that the Government of the Republic of Kenya needs to account completely for the Net Proceeds of the Eurobondprior to the Issuance of any new International Sovereign Bond.

26. We further caution and serve notice that should the above Named Persons/Entities proceed with the issuance of any new International Sovereign Bond (Eurobond) by the Government of the Republic of Kenyawithout satisfactory resolution of the unresolved matters raised in respect of the 2014 Eurobond, then the Named Persons/Entitiesrisk declaration of such debt as Odious Debt by the Government of Kenya, acting on behalf of the People of Kenya.

27. This Cautionary Notice and Notification of Material Facts is based on the Concerns and Significant and materials Unexplained and Unresolved Issues that arose from the International Sovereign Bond Issued by the Republic of Kenya on 24 June 2014 which are presented above.

Page 1 2

Leave a Comment


2012 The Kenyan DAILY POST. All Rights Reserved. - Designed by Denno